Question

Northern Communications has the following​ stockholders' equity on December 31​, 2018​:

Stockholders' Equity
Paid-In Capital:
Preferred Stock—5%, $11 Par Value; 150,000
shares authorized, 20,000
shares issued and outstanding $220,000
Common Stock—$2 Par Value; 575,000 s
hares authorized, 380,000
shares issued and outstanding 760,000
Paid-In Capital in Excess of Par—Common 680,000
Total Paid-In Capital 1,660,000
Retained Earnings 200,000
Total Stockholders' Equit $1,860,000
Requirement 1. Assuming the preferred stock is cumulative, compute the amount of dividends to preferred stockholders and to common stockholders for 2018 and 2019 if total dividends are $9,000 in 2018 and $45,000 in 2019. Assume no changes in preferred stock and common stock in 2019.
2. Record journal entries for 2018 assuming Northern communication declared dividend on Dec 31.

Answer 1

2018

Preferred Stock Dividend Paid = $9,000

Common Stock Dividend = $0

2019

Preferred Stock Dividend Paid = $13,000

Common Stock Dividend = $32,000

Journal Entry

Dec 31

Dividend : Preference Stock $11,000 (debit)

Cash $9,000 (credit)

Shareholders for dividends $2,000 (credit)

Step-by-step explanation:

Preference Stockholders have preference over Common Stockholders when it comes to payments of dividends.

That means preference dividends are paid first then the remainder belongs to the Common Stockholders.

If Preference Stocks are cumulative, dividends in arrears not paid in previous years are carried over to the next year and these have to be paid up before any distributions for that year are made.

Calculation of Stock Dividend

Stock Dividend gives a fixed dividend to Preference Stockholders every year.

Stock Dividend = ( $220,000 × 5%) = $11,000

2018

Preferred Stock Dividend Paid = $9,000

Preferred Stock Dividend in Arrears = $2,000

Common Stock Dividend = $0

2019

Preferred Stock Dividend Paid = ($2,000 - In-arrears + $11,000 - Current Year) = $13,000

Preferred Stock Dividend in Arrears = $0

Common Stock Dividend = ($45,000 - $13,000) = $32,000